Reply form for the
Discussion Paper on Share Classes
6 April 2016
Date: 6 April 2016
Responding to this paper
The European Securities and Markets Authority (ESMA) invites responses to the specific questions listed
in the Discussion Paper on Share Classes (SC), published on the ESMA website.
Instructions
Please note that, in order to facilitate the analysis of the large number of responses expected, you are
requested to use this file to send your response to ESMA so as to allow us to process it properly. Therefore, ESMA will only be able to consider responses which follow the instructions described below:

use this form and send your responses in Word format (pdf documents will not be considered except for annexes);

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
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TEXT HERE” between the tags.
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
if they respond to the question stated;

contain a clear rationale, including on any related costs and benefits; and

describe any alternatives that ESMA should consider
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and ‘Data protection’.
3
Introduction
Please make your introductory comments below, if any:
<ESMA_COMMENT_ DP_SC_1>
The Association Française de la Gestion financière (AFG) welcomes the opportunity to answer to the
ESMA’s second discussion paper on share classes of UCITS.
Share classes are for a certain number of years an important tool of development for UCITS. They are
extensively used in all major European fund issuing countries. The economic efficiencies allow existing
funds to grow sufficiently so as to reap the advantages of scale, as well as to boost the European asset
management industry’s competitiveness abroad. This is a key feature. Thus, share classes should not be
curbed, but encouraged as innovation has always been at the heart of the UCITS framework success.
AFG advises ESMA to consider the publication of an advice under Article 29 to NCAs so as to permit the
industry and investors to know the boundaries of the permitted share classes with a rather rapid
timeframe. Not knowing which the European rule is proves detrimental to UCITS vehicles’ planning and
further development.
We globally agree with the ESMA’s proposals. A principles-based framework accommodates very well the
matter of financial innovation and permits UCITS vehicles to be competitive. Financial innovation should
not to be curbed; it is important to have a competitive regulation resulting in innovative and scale effective
vehicles.
We are very confident that duration, equity, volatility, FX, credit, dividend etc may very well respect the
proposed operational principles as long as the aim is to obtain risk reduction, partial or total, on a
systematic and transparent basis. We have perceived a disconnexion between these common sense
operational principles and the restrictive hypothesis of only one type of risk reduction (FX) and we believe
that this problem stems from the wrong assumption made by some stakeholders worded in § 19. A
common risk profile is not appropriate to define the common investment objective. The common
performance engine represented by the common pool of assets may be downward risk adjusted so as to
propose to adress several distinct risk potential profiles.
The existing regime of UCITS share classes in some EU jurisdictions ensures the competitiveness of the
EU vis-à-vis non-EU competitors: this existing level of competiveness should not be endangered through
the future pan-EU harmonized regime, through disproportionate additional constraints and organizational
costs. In any case an extended grandfathering provision should allow existing share classes to continue.
<ESMA_COMMENT_ DP_SC_1>
4
Q1: Would you agree with the description of share classes?
<ESMA_QUESTION_DP_SC_1>
AFG members agree with the description made by ESMA of share classes. ESMA points rightly to the
importance of the use of share classes and clearly describes the stakes in terms of business, operational
and risk implications.
AFG agrees that in the case of UCITS, the use of derivatives at the level of the share class should not
increase the fund exposure to an existing risk: the hedging overlay should only reduce an existing market
risk of the relevant underlying portfolio (such as interest risk reduction or equity risk reduction). The risk
considered for hedging can be either direct (as interest rate risk or currency risk) or indirectly embedded in
an instrument as are inflation, dividend or volatility for example.
We would also like to indicate that ESMA should more clearly point out to the systematic character of the
overlay. Indeed, the fact that the reduction of a risk is implemented on a systematic basis is a key element
to consider.
What is Systematic hedging
Hedging strategies are systematic because there is a systematic and permanent reduction of a given risk.
The hedging strategy will be applied systematically to hedge the defined risk, with no discretion by the
manager in determining whether or not to apply the hedge and to which proportion. For this purpose, the
fund will trade the necessary derivative instruments required to hedge the identified risk. However that
should not mean that the asset manager will not have the technical choice of the instruments to use in
order to implement the hedge: type of derivative, maturity…
TYPE YOUR TEXT HERE
<ESMA_QUESTION_DP_SC_1>
Q2: Do you see any other reasons for setting up share classes?
<ESMA_QUESTION_DP_SC_2>
AFG members believe that the identified reasons for setting-up different fund share classes are comprehensive and reflect the realities of our industry. Client demand and competitiveness of European funds
(investors’ holding ratios, cost / time efficiency, economies of scale …), are among the main reasons for
developing share classes.
TYPE YOUR TEXT HERE
<ESMA_QUESTION_DP_SC_2>
Q3: What is your view on the principle of “common investment objective”?
<ESMA_QUESTION_DP_SC_3>
AFG strongly believes that ESMA is perfectly right by saying that share classes of the same fund should
have a common investment objective reflected by a common pool of assets.
As the concept of investment strategy has not the same definition from one country to another, the clarification of ESMA, ie that this means a common pool of assets is more than welcome as it clearly sets a
same meaning in every Member State.
The common investment strategy means a common pool of assets that permits subsequently for each
share class to implement distinctively an overlay of systematic risk reduction, partial or total, on one or
several market risks (for example equity, duration, credit spread, inflation, volatility risk). These risk features do not depart a class from the common investment strategy (the core portfolio) defined at the fund
level which is based on the same “engine”, i.e. the fund manager’s expertise.
5
Unlike as suggested by the wording of paragraph 19 of the discussion paper, we observe that a “common
investment objective” does not coincide with a “common risk profile”. A derivative overlay only proposes
more choice to investors to find adapted solutions to their own risk profile, risk tolerance, investment
horizons, etc. and is not intended to alter the investment objective of the common asset pool. But whatever the risk tolerance of the relevant fund investors is, the overlay must not increase risk exposure but
reduce (totally or partially) market risk within the portfolio. Increasing risk through an addition of exposure
is not intellectually unconceivable and could be efficient, but we agree that the primary source of risk of
the UCITS should be included in its core portfolio, the common pool of assets, and that the overlay specific to a class should not add risk.
We are not comfortable with the assertion in §18 as the objective of hedged share classes is the risk
reduction, not the improvement of the value/performance of the investment.
TYPE YOUR TEXT HERE
<ESMA_QUESTION_DP_SC_3>
Q4: Which kinds of hedging arrangements would you consider to be in line with this principle?
<ESMA_QUESTION_DP_SC_4>
AFG agrees with the principle based approach proposed by ESMA and considers that a large variety of
overlays are in line with this principle as long as they do not increase risk exposure but aim to reduce
market risk within the portfolio.
Shares classes can implement strategies of mitigating one or more risks. The concept of risk reduction/mitigation is appreciated at the level of the overall strategy implemented.
For illustration (as we cannot be exhaustive and thus we adhere to the principle based approach), please
see a list of several types of share classes that are in line with the principle:
Risk factors (non exhaustive)
-
Equity risk
Duration risk
Credit risk
Exchange rate risk
Inflation risk
Dividend risk
Volatility risk
Instruments authorised (non exhaustive)
The risk reduction strategies at the level of share classes can be based on the use of one or more of the
following instruments:
a)
b)
c)
d)
Swap and CFD
Future/forward
Options/Hedged options
CDS
Derivatives can be either dealt in on regulated/organised markets or OTC.
Several types of the aforementioned overlays have been tested for many years in the EU (duration, equity,
exchange rate risk – to cite the more heavily used) with success. It is the principle of a common pool of
assets at the level of the fund together with the risk mitigation target on a perpetual (systematic) basis at
the level of the share class that define the universe compatible with the UCITS format.
6
However, our members question the need to refer the Box 8 of CESR’s Guidelines (as it is suggested in
paragraph 21 of ESMA’s DP), which defines rules in a specific context linked to the calculation of hedging
arrangements for the commitment global risk metric only (and the Guidelines themselves recognise the
very narrow scope of their definition compared to existing strategies of hedging/risk mitigation: “The scope
of hedging arrangements as defined in these Guidelines is much narrower than that of strategies often
referred to as hedging strategies.”). The commitment metric is a more “empiric” calculation of the global
exposure which constitutes a linear approximation that does not account for the capacity of amplification
or reduction of underlying risk. A sum of standardised provisions on netting, duration-netting, hedging and
cash netting are set in order to permit to adjust the method so as to give a more precise view of the real
capacity of amplification of risks present in the fund. The commitment method is more adapted for more
simple and straightforward strategies whereas for more derivative intensive use, the Value at Risk method
is more adapted to correctly apprehend the underlying risk. In conclusion, AFG advises to set the principles linked to the risk mitigation objective of the share classes rather than refer to the rules linked to
hedging arrangements under the commitment method. Thus, these principles could be:
Risk mitigation strategies in the context of UCITS share classes should comply with the following principles:
- risk mitigation strategies should hedge against a risk factor present in the fund portfolio;
- there should be a verifiable reduction of risk at the UCITS level;
- investment strategies that aim to generate a return should not be considered as hedging arrangements;
- they should be efficient in stressed market conditions.
.<ESMA_QUESTION_DP_SC_4>
Q5: What is your view on the principle of “non-contagion”?
<ESMA_QUESTION_DP_SC_5>
AFG members agree to the objective to avoid contagion risk and tight risk management means should be
employed so as to manage/mitigate this risk. Risk controls specific to the overlay in order to
manage/follow up potential contagion effects should be implemented.
We globally agree with the 5 operational principles listed in §28. In our view, some adjustements would
nevertheless offer better clarity of the principles:
- §28. c. Regarding the stress tests principle, it should be recalled that overall stress tests carried
out at the level of the fund portfolio are efficient to gauge the sensitivity of the portfolio to a series
of risk factors. Our members remind that exposures to a counterparty deriving from any derivative
overlay should primarily be managed and contained by ensuring sufficient collateral has been
exchanged (in line with EMIR and additional UCITS requirements), as well as by applying internal
risk limits, instead of estimating the more hypothetical and remote probability of a material
“contagion” effect on the other shareholders. Eventually, a simple sensitivity test (short and long)
performed on a market benchmark or reference portfolio with a price shock of +/- 1% or a “reverse
stress-test” could be sufficient to identify any “contagion risks” inherent to the share class
exceeding the committed collateral amounts.
- §28. d We would prefer that this § does not contravene with rules dealt in other texts (Mifid rules
for product governance for instance) and thus a more generic wording should be retained : The
UCITS management company should be able to evidence, ex ante, that the implementation of a
derivative overlay will lead to a share class which better aligns with distinct risk preferences
(profiles) of potential investors;
- §28.e As predetermination is already a criterion and the concept of transparency is fully adapted
to encompass relevant information to give, we propose to reformulate : The derivative overlay
should be implemented according to a transparent hedging strategy.
Regarding the § 29, we also globally agree with the principles notwithstanding some reservations, as
explained hereafter:
7
-
-
-
§29. b and c : Share classes can implement total or partial risk reduction and we understand that
partial hedging is rightly allowed. The global level of the risk reduction should be specified in the
fund’s official documents. When it is possible to specify a target level (for example 50%), there
should be some leeway recognized around the target level (ex: residual exposure of 10% for a
total hedge 40/60). The general rule should be the respect of the promise given to investors in the
prospectus with a certain degree of operational flexibility, but no discretion on the respect of the
target level (if a target level is specified).
§29. d : “at any time” should be replaced by “ongoing basis” which is better aligned with the
customary conditions for respecting ratios within the UCITS Directive and the reality of hedging,
including FX hedging, where daily price movement can lead to over or under hedging that will lead
to reset “ex post”.
§29. e is not necessary, as §29. d already fixes the monitoring rule. Therefore, §29. e should be
deleted.
Regarding the § 30., we disagree with the hypothesis that only one type of risk reduction is respecting the
above mentioned principles. We are very confident that duration, equity, volatility, FX, credit, etc may very
well respect these operational principles as long as the aim is to obtain risk reduction on a systematic and
transparent basis. We have perceived a deconnection between these common sense operational
principles and the restrictive hypothesis of only one type of risk reduction (FX) and we believe that this
problem stems from the wrong assumption made by some stakeholders worded in § 19. A common risk
profile is not appropriate to define the common investment objective. The common performance engine
represented by the common pool of assets may be downwards risk adjusted so as to propose to adress
several distinct risk potential profiles.
<ESMA_QUESTION_DP_SC_5>
Q6: Are you aware of any material evidence of investors in one share class suffering losses as a result of the crystallisation of risk in another share class?
<ESMA_QUESTION_DP_SC_6>
No. We have a clear experience of what has happened in France and know that there has been no example of such case. We doubt that there are examples elsewhere in Europe concerning UCITS.
<ESMA_QUESTION_DP_SC_6>
Q7: Where do you see a potential for contagion risk arising from the use of derivative hedging arrangements? What are the elements of this contagion risk? (cf. paragraph 23)
<ESMA_QUESTION_DP_SC_7>
ESMA is perfectly right at §23 to acknowledge the lack of legal asset segregation and discuss potential
cases of spill-over risks. We believe there is no issue with accounting P&L allocation. Regarding risk
potential contagion, the cases are extremely limited, as we will show hereafter.
There are solutions to effectively limit contagion risk.
Risk Management monitoring is very important so as to be able to drastically limit the probability of occurrence of such a risk.
The contagion risk can be defined as the risk of one share class impacting the net asset value of other
share classes. The contagion may come from 4 sources.
-
1. Fees split
8
Common costs are shared and split between different share classes at the pro rata of the net assets.
Dedicated fees to a share class (turnover commissions, transaction fees…) are affected in accounting
to the concerned share class. It is reasonably thought that the accounting segregation prevents contagion from one share class to another.
-
2. Insolvency linked to the default of a counterparty
The default of a counterparty of an OTC contract on a share class does not necessarily impact the
other share classes. In most cases, the default results in a loss of profit entirely and solely supported
by investors in the affected share class.
Several situations are possible among which we can already exclude those in which the shares are in a
debtor position with respect to the counterparty.
o If the net assets of the share class are higher than the amount of the loss related to the default (Net Risk= Marked to Market - Collateral), then the loss can be absorbed by the
share class. There is no effect of contagion on the other share classes. After the default,
the net assets of the share class remain positive.
o On the other hand, if the net assets of the share class are lower than the amount of the
loss related to the default (Net Risk), then the net assets apportioned to this particular
share class are not sufficient to cover their commitments. In this theoretical case, there is
contagion on the other share classes since the assets of the latter are called in to compensate the insolvency of the share class.
The risk of contagion related to the default of the counterparty can be mitigated through several
risk management solutions, for instance by monitoring that the exposure to the latter remains in
line with the counterparty risk limits (10%) in connection with the relative size of the net assets of
the share class or by limiting the maturity of the derivative instruments used (especially for FX
hedged share class), in order to reset the Net Risk on a frequent and regular basis.
-
3. Insolvency linked to the incapacity of a share class to honor its engagements
Other cases of insolvency of a share class may occur; in particular the cases where the full amounts due
by a share class exceed the value of the net assets apportioned to the share class.
However, this risk is suitably treated /captured by the global risk limits calculation at the fund level knowing
that dedicated instruments on a specific UCITS share class only reduce risks of the common assets.
-
4. Incapacity of a share class to honor redemptions
A share class can be in incapacity to honor redemptions if its net assets are not sufficiently liquid
to be sold in time so as to release the cash to investors.
The assets being fungible from one share class to another, the liquidity risk is managed at the
fund level. From this point of view, there is no additional risk of contagion between two shareholders of the same share class as between two shareholders of different share classes.
The liquidity risk stemming from the share class’s dedicated derivatives is more a question of valuation risk of which impacts only the NAV of the share class. The accounting segregation of the
assets between the share classes makes then possible to avoid the risk of contagion.
9
Finally, the contagion risk may come “theoretically” from some rare cases of insolvency of the share class:
In the case of the default of one counterparty, when the net assets are too small compared
to the net risk. This can be monitored with different risk management solutions so as to efficiently limit the
counterparty risk,
or when the net assets are too small compared to the amount due by a share class to a
counterparty, this risk being correctly mitigated by the global risk limitation at the fund level.
<ESMA_QUESTION_DP_SC_7>
Q8: Do you agree with the operational principles set out in paragraphs 28 and 29?
<ESMA_QUESTION_DP_SC_8>
We globally agree with the 5 operational principles listed in §28. In our view, some adjustements would
nevertheless offer better clarity of the principles:
- §28. c. Regarding the stress tests principle, it should be recalled that overall stress tests carried
out at the level of the fund portfolio are efficient to gauge the sensitivity of the portfolio to a series
of risk factors. Our members remind that exposures to a counterparty deriving from any derivative
overlay should primarily be managed and contained by ensuring sufficient collateral has been
exchanged (in line with EMIR and additional UCITS requirements), as well as by applying internal
risk limits, instead of estimating the more hypothetical and remote probability of a material
“contagion” effect on the other shareholders. Eventually, a simple sensitivity test (short and long)
performed on a market benchmark or reference portfolio with a price shock of +/- 1% or a “reverse
stress-test” could be sufficient to identify any “contagion risks” inherent to the share class
exceeding the committed collateral amounts.
- §28. d We would prefer that this § does not contravene with rules dealt in other texts (Mifid rules
for product governance for instance) and thus a more generic wording should be retained : The
UCITS management company should be able to evidence, ex ante, that the implementation of a
derivative overlay will lead to a share class which better aligns with distinct risk profiles or
preferences of potential investors;
- §28.e As predetermination is already a criteria and the concept of transparency is fully adapted to
encompass relevant information to give, we propose to reformulate : The derivative overlay should
be implemented according to a transparent hedging strategy.
Regarding the § 29, we also globally agree with the principles notwithstanding some reservations, as
explained hereafter:
- §29. b and c : Share classes can implement total or partial risk reduction and we understand that
partial hedging is rightly allowed. The global level of the risk reduction should be specified in the
fund’s official documents. When it is possible to specify a target level (for example 50%), there
should be some leeway recognized around the target level (ex: residual exposure of 10% for a
total hedge 40/60). The general rule should be the respect of the promise given to investors in the
prospectus with a certain degree of operational flexibility, but no discretion on the respect of the
target level (if a target level is specified).
- §29. d : “at any time” sould be replaced by “ongoing basis” which is better aligned with the
customary conditions for respecting ratios within the UCITS Directive Directive and the reality of
hedging, including FX hedging, where daily price movement can lead to over or under hedging
that will lead to reset “ex post”.
- §29. e is not necessary, as §29. d already fixes the monitoring rule. Therefore, §29. e should be
deleted.
<ESMA_QUESTION_DP_SC_8>
Q9: Do you consider the exposure limits in paragraphs 29.b and 29.c to be appropriate?
<ESMA_QUESTION_DP_SC_9>
10
§29. b and c : Share classes can implement total or partial risk reduction and we understand that partial
hedging is rightly allowed. The global level of the risk reduction should be specified in the fund’s official
documents. When it is possible to specify a target level (for example 50% or 95%), there should be some
leeway recognized around the target level (ex: residual exposure of 10% for a total hedge 40/60 or
85/105%). The general rule should be the respect of the promise given to investors in the prospectus with
a certain degree of operational flexibility, but no discretion on the respect of the target level (if a target
level is specified).
<ESMA_QUESTION_DP_SC_9>
Q10:
Which stresses should be analysed as part of the stress tests?
<ESMA_QUESTION_DP_SC_10>
§28. c. Regarding the stress tests principle, it should be recalled that overall stress tests carried out at the
level of the fund portfolio are efficient to gauge the sensitivity of the portfolio to a series of risk factors. Our
members remind that exposures to a counterparty deriving from any derivative overlay should primarily be
managed and contained by ensuring sufficient collateral has been exchanged (in line with EMIR and
additional UCITS requirements), as well as by applying internal risk limits, instead of estimating the more
hypothetical and remote probability of a material “contagion” effect on the other shareholders. Eventually,
a simple sensitivity test (short and long) performed on a market benchmark or reference portfolio with a
price shock of +/- 1% or a “reverse stress-test” could be sufficient to identify any “contagion risks” inherent
to the share class exceeding the committed collateral amounts.
<ESMA_QUESTION_DP_SC_10>
Q11:
Which hedging arrangements would you consider as compatible with the operational
principles outlined above? Insofar as you consider some (or all) of the hedging strategies in
paragraph 30(a)-(b) as being compatible with these operational principles, please justify how
such strategies are compatible with each one of the principles.
<ESMA_QUESTION_DP_SC_11>
Regarding the § 30. and b., we disagree with the hypothesis that only one type of risk reduction is
respecting the above mentioned principles.
We are very confident that duration, equity, volatility, FX, credit, dividend etc may very well respect these
operational principles as long as the aim is to obtain risk reduction on a systematic and transparent basis.
We have perceived a deconnection between these common sense operational principles and the
restrictive hypothesis of only one type of risk reduction (FX) and we believe that this problem stems from
the wrong assumption made by some stakeholders worded in § 19. A common risk profile is not
appropriate to define the common investment objective. The common performance engine represented by
the common pool of assets may be downward risk adjusted so as to propose to adress several distinct risk
potential profiles.
We would like to express again our agreement to have a principles-based approach. Financial innovation
is not to be curbed; it is important to have a competitive regulation resulting in innovative and scale
effective vehicles. Even if we can discuss for the sake of illustration several examples of risk reduction
strategies that our membres either use for a certain number of years or envisage to use, regulation is
done for tommorrow and not for yesterday. We cannot brainstorm today so as to be exhaustive on the
types of innovative risk reduction profiles, and it would even be dramatic to envisage to be static.
<ESMA_QUESTION_DP_SC_11>
Q12:
Notwithstanding the fact that ESMA considers the above operational principles as minimum requirements, are there additional operational principles that should apply to address
the non-contagion principle?
11
<ESMA_QUESTION_DP_SC_12>
As we have discussed earlier, we globally agree with the operational principles that ESMA proposes
regarding the non-contagion principle. The strongest reservation we have does not concern the ESMA’s
proposals, but the hypothesis mentioned by ESMA at §30 a and b based on a wrong assumption made by
some stakeholders worded in § 19 on a common risk profile. This assumption is not compatible with the
principles proposed by ESMA and thus erroneously interferes with the application of the principles on the
types of risk mitigation strategies.
<ESMA_QUESTION_DP_SC_12>
Q13:
What effect would these additional measures have on the compatibility of the operational principles with further hedging arrangements?
<ESMA_QUESTION_DP_SC_13>
N/a
<ESMA_QUESTION_DP_SC_13>
Q14:
What is your view on the principle of “pre-determination”?
<ESMA_QUESTION_DP_SC_14>
We agree. Indeed, the systematic character of the overlay (no discretion on the fact to apply or not the
hedge, or to change in a discretionary manner as opposed to through a predefined model the target level
of the hedge that has been “promised” to investors) is an important operational principle to set. It clarifies
the definition of what constitutes a share class, as performing a discretionary management of the overlay
(to gain performance for instance) is not acceptable in a share class because it changes the fund’s performance engine.
This is not to be mixed with the operational implementation where the management team will merely trade
the necessary derivative instruments required to mitigate the identified risk, and where some discretion
must be retained as to the choice of the type of instrument (e.g. a forward rate agreement, a futures
contract, an interest rate swap, etc.), as well as their respective terms. For instance, the choice on whether to implement an overlay using the more liquid (and less-margin intensive) futures market, as opposed
to an OTC forward contract or a swap, ultimately depends on several factors, including the precise composition of an asset portfolio, of the investor base, the individual portfolio manager’s “view” on several
external factors, such as the future rate environment, company creditworthiness and valuations, etc.
Thus, some degree of operational discretion remains therefore necessary and is compatible with the
aforementioned principle to the extent a hedging overlay is applied consistently. We understand the ESMA’s reference to the lack of discretion regarding the hedging mechanisms in paragraph 34 of the discussion paper as referring to non-operational choices, to those “mechanisms” or “processes” that constitute a
performance engine, departing from simple choices of implementation within a pre-approved process.
<ESMA_QUESTION_DP_SC_14>
Q15:
Are there additional requirements necessary to implement this principle?
<ESMA_QUESTION_DP_SC_15>
ESMA should clarify that this principle is defined so as to avoid set ups where the aim is to perform a
discretionary management of the overlay (to gain performance for instance) because it changes the fund’s
performance engine.
This systematic requirement is not to be mixed with the operational implementation where the management team will merely trade the necessary derivative instruments required to mitigate the identified risk.
<ESMA_QUESTION_DP_SC_15>
Q16:
What is your view on the principle of “transparency”?
12
<ESMA_QUESTION_DP_SC_16>
AFG agrees with this important principle and believes that the current UCITS reporting requirements do
already translate it in practice, in the fund’s respective KIID, in the prospectus and in the annual report.
Important is that these documents remain available to investors via the asset management company’s
website
. <ESMA_QUESTION_DP_SC_16>
Q17:
Do you consider the disclosure requirements to be sufficient?
<ESMA_QUESTION_DP_SC_17>
Yes. Existing reporting requirements under UCITS are sufficiently informative for a potentially very large
investment audience, spanning varying degrees of financial literacy from retail to professional investors,
and without over-complicating the information or over-burdening the readers. Ultimately, the existing
requirements also strike an appropriate balance in not over-burdening compliance staff at individual asset
management companies with having to provide too detailed information with little or no added-value for
the end-investor.
<ESMA_QUESTION_DP_SC_17>
Q18:
Notwithstanding the fact that ESMA considers the above operational principles on
transparency as minimum requirements, which modifications would you deem necessary?
<ESMA_QUESTION_DP_SC_18>
We believe the UCITS asset management industry already provides a wealth of information to investors
via the existing requirements. Hence no modifications are in our view necessary. Consequently, we would
suggest the removal of the operational principle b. under paragraph 36 of the discussion paper, as a list of
share classes bearing “contagion risk” remains superfluous given the existing disclosures on all types of
share classes in fund prospectuses and annual reports.
<ESMA_QUESTION_DP_SC_18>
Q19:
Do you see merit in further disclosure vis-à-vis the investor?
<ESMA_QUESTION_DP_SC_19>
No.
<ESMA_QUESTION_DP_SC_19>
Q20:
If a framework for share classes, based on the principles as outlined in this paper, was
introduced at EU level, what impact on the European fund market could this have?
<ESMA_QUESTION_DP_SC_20>
AFG agrees with the principles-based framework envisaged by ESMA.
The strongest reservation we have does not concern the ESMA’s proposals, but the hypothesis mentioned
by ESMA at §30 a and b based on a wrong assumption made by some stakeholders worded in § 19 on a
common risk profile. This assumption is not compatible with the principles proposed by ESMA and thus
erroneously interferes with the application of the principles on the types of risk mitigation strategies.
Thus, we urge the ESMA to stick to its global framework which represents a complete set of principles that
clarify the notion of share classes within the UCITS protective shell. It seems to us that the application of
the principles does not limit the range of acceptable share classes to only those intended to hedge against
currency risks.
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As the creation of share classes is entirely demand-driven and given that there are multiple risk factors in
today’s markets other than currency ones, the European UCITS industry is concerned of limitations that
may jeopardise its need to meet client demands and to reap larger economies of scale by attracting more
investors (across the EU and from non-EU jurisdictions) into larger funds. To pick an example: were
duration-hedged share classes to be deemed incompatible under the ESMA final principles, duration
hedging would need to be performed via the offer of a stand-alone product, or via a master-feeder structure, with considerably higher costs and longer time-to-market. The same would occur with regard to other
types of share classes. Investors are likely to turn to non-EU competitors in search of more and better
tailored solutions, further exacerbating the problem of sub-scale funds in Europe.
<ESMA_QUESTION_DP_SC_20>
Q21:
Given ESMA’s view that certain hedging arrangements currently in place might not be
compliant with the common principles of share classes as outlined above, which kinds of transitional provision would you deem necessary?
<ESMA_QUESTION_DP_SC_21>
AFG strongly advises for transitional provisions for implementation of 24 months and a grandfathering
clause on existing share classes as long as they do not take in new investors.
<ESMA_QUESTION_DP_SC_21>
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